5 Things To Ponder: Interesting Stuff

September 16, 2014

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I had to laugh this morning when I read Eddy Elfenbein’s commentary on the recent market correction:

“The vicious bear market that rocked Wall Street for a full two weeks has finally come to an end. Measuring from close to close, the S&P 500 plunged for a massive 3.94% loss between July 24 and August 7.”

He is correct. As I discussed recently, there has been an ever DECREASING rate of corrective actions in the markets over the last couple of years as the Federal Reserve has been heavily engaged in accommodative monetary interventions. To wit:

“There is an interesting phenomenon occurring in the financial markets that absolutely, positively, will not last indefinitely – the ‘Giant Shrinking Correction.’ The chart below shows the S&P 500 (weekly closing data) since the beginning of 2009, with all relevant corrections identified in terms of percentage.”

As a reminder, this kind of market action is neither normal or healthy longer term and has only seen near historical major market peaks. Of course, timing is everything.

With the current influx of liquidity coming to an end in October, combined with a plan to start to increasing interest rates in 2015, the Fed has clearly begun to signal the end of 5 years of ultra-accommodative policies. The question that remains to be answered is whether or not the economy is actually strong enough to be removed from “life support?”

This weekend’s “Things To Ponder” is just a smattering of interesting articles cover a wide range of topics that I hope you will find interesting, informative and contemplative.

1) The Market Is Richly Valued – Should You Worry? by Jeremy Glaser via Morningstar

“It’s one thing to say that the market is richly valued relative to historical standards. It’s a completely different thing to say that this means stocks are going to decline over the next one year, three years, or even five years. As I mentioned, in 1996 and in 2002, the S&P 500 was valued at similar levels and went on to have a great run over the next five years until it ended in a crash. So even over a time period as long as five years, saying that the market is relatively richly valued relative to history doesn’t tell you much about what stocks are actually going to do in the near term.”

[Note: Time horizons are critically important.]

Read Also: The Fed Is Screwed by Michael Gayed via MinyanVille Pro

“This is a humongous problem for the Fed. If the marketplace does not believe inflation is coming, after trillions of dollars in stimulus, then what is it going to take for reflation to finally take hold? The fact that this is happening at the same time the Fed is going to be ending Quantitative Easing is, to put it mildly, somewhat disturbing and suggests that equities may be nearing a moment of truth as bonds scream that things are nowhere near as optimistic as all-time stock market highs would lead you to believe.”

2) The Shiller P/E Weekend Reading List

There was a litany of articles out this past week in particular debating Shiller’s CAPE P/E ratio. I have discussed this issue previously in “Is Shiller’s CAPE Just B.S.” and “Shiller’s CAPE, A Better Method.” (One important note is that looking back in history, about the time that mainstream analysts start trying to “debunk” the value of valuation, we are closer to historical market peaks than not.)

Below is a reading list of more arguments over Shiller’s CAPE by Cullen Roche via Pragmatic Capitalist

The Mystery of Lofty Stock Market Elevations – Robert Shiller
The Stock Market’s Missing Ingredient – Barry Ritholtz
An Old Friend: The Stock Market’s Shiller P/E – Cliff Asness
on Bob Shiller and CAPE – Marginal Revolution
Under What Circumstances Should You Worry That The Stock Market Is ‘Too High’? – Brad Delong
Shiller CAPE Market Valuation: Terrible For Market Timing, But Valuable For Long-Term Retirement Planning – Michael Kitces
Fixing the Shiller Cape – Philosophical Economics
More Thoughts on the CAPE and Valuations – Cullen Roche

3) Economists Warn Over Loss Of Important Economic Strength by Howard Schneider via Reuters

“The U.S. labor market has become steadily less dynamic since 1990, with workers seemingly locked into particular jobs and a more sluggish process of job creation and destruction in the private sector, according to research to be presented to global central bankers on Friday.

The research by two top labor economists portrayed the United States as potentially losing one of its notable economic strengths – the robust flow of workers between jobs, and the churn of employment as companies succeed and fail.”

Read Also: Median Household Incomes 5 Years After The Great Recession by Doug Short via Advisor Perspectives

4) Fed Optimism Will Give Way To Economic Meltdown by John Crudele via New York Post

“Even if Yellen and Draghi say exactly the opposite, Wall Street — which is like an industrial-size clothes dryer on the high setting — will spin whatever words come out of the mouths of the world’s two most important bankers into the magical phrase, ‘Low interest rates will last forever.’

Stocks prices will rise. Investors will be delighted. Members of the media won’t look very deeply into the matter as they head off for another glorious summer weekend.

And because of our inattention, the financial markets will become even more dangerous.”

Read Also: If QE Is Ending Because Of Success, Here Are Simple Questions by Guy Haselmann of Scotiabank via ZeroHedge

“If QE is ending because it was so successful, then why is aggressive forward guidance necessary?
If QE worked so well, then why will Yellen likely need to mention ‘the elevated number of part time workers’, ‘under-utilization of labor resources’ or ‘room for improvement in the labor market’?
In regard to its inflation mandate, there is no evidence that QE has had any impact other than causing asset price inflation.
Shouldn’t the lack of success at achieving the desired results in the US and Japan have curtailed such hasty Pavlovian responses?”

5) Is Oil Price Sending A Message? via Jeffrey Snider via Alhambra Partners

“I think oil prices might actually have overstated the spring “forward” this year – perhaps owing more to the geopolitics end of it than optimism about the perpetual and perpetually elusive recovery. In any case, the recent drop in oil prices is potentially indicative of, with these other correlations in mind, not just an end to the spring “bounce” but something perhaps more destabilizing economically. With WTI now within earshot of the winter low point, there is at least some scale to that idea as we look for further observation for the rest of the third quarter and beyond. Given the performance of credit markets as well, there is more than a good deal of pessimism about economic prospects however the conclave at Jackson Hole and the pyramid of economists that parrot it stand.”

Read Also: Is The Fed Too Hawkish? by Ron Isana via CNBC

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